Preliminary Economics

Transcription

1 Preliminary Economics Week 3: The Circular Flow of Income Student name:. Class code:.. Teacher name:. DUX

2 1 WEEK 3: THE CIRCULAR FLOW OF INCOME Students learn to: Examine economic issues economic factors underlying decision-making by: - individuals spending, saving, work, education, retirement, voting and participation in the political process - business pricing, production, resource use, industrial relations - governments influencing the decisions of individuals and business examine similarities and differences between the Australian economy and one economy in Asia in relation to economic growth & quality of life, unemployment, distribution of income, environment & role of government. understand the different types of Economic Systems and their key functions. ECONOMIC FACTORS UNDERLYING DECISION MAKING The choices made by INDIVIDUALS involve a variety of factors, including: Age Income Expectations Future plans about work, family, education. Personality Present family circumstances Risk aversion The choices BUSINESSES make are influenced by a number of factors. The prices set by business are chosen based on a desire to maximise profit. Businesses make a number of choices about the way they market their products, choosing to focus on a specific market or a mass market. Businesses are also always seeking to minimise costs and get the best use of resources.

3 2 Some businesses may also be influenced by ethics when making choices about what to produce. Business must also deal with employee relations and labour issues, including: - Awards - Enterprise Agreements - Work Cover arrangements - OHS - Individual contracts GOVERNMENTS can have a strong influence on the behaviour of both individuals and businesses through their choice of policies and regulations. This can be done through: Taxation policies Banning certain activities (eg- collusion) Providing subsidies to certain businesses Tax rebates Legislation REVIEW EXERCISE 1: FACTORS AFFECTING ECONOMIC CHOICES 1. Explain the sorts of factors that may influence an individuals economic decision making. 2. What are the fundamental factors affecting businesses when they engage in the economy?

4 3 3. Define the following terms and explain how they might effect a businesses decisions on a day-today basis: i) Employment Awards ii) Enterprise Agreements iii) Work Cover

5 4 iv) OHS v) Individual Contracts 4. How might a Government influence individual and business behaviour?

6 5 5. Provide ONE example of each of these government actions designed to influence the behaviour of individuals or businesses: i) Taxation Policies ii) Banning collusion iii) Providing subsidies to certain businesses iv) Tax rebates v) Legislation

7 6 CASE STUDY: THE AUSTRALIAN EOCNOMIC SYSTEM Capitalism in Australia You have already seen that a capitalist economy is one in which the participants are able to choose the way in which they allocate their resources. It will not surprise you to know that this is the system that we use in Australia: the people and businesses who act in the Australian economy are able to decide the way in which they will use the resources that they control. There are a number of pre-conditions that make this possible. 1. Private Property: In order to be able to make decisions about the resources that you own, it is important that you are given the right to private ownership. In Australia we tend to accept that this is obvious, but it is not the way the economy is managed in all countries. For example, for many years the Chinese government believed that it was more efficient for these decisions to be made by the government (although this has changed in more recent years), and in Zimbabwe the government has moved to claim more and more of the available resources. 2. Legal Framework: If a person is going to own property, then there must be a robust legal framework in place to protect it. Imagine that it was possible for someone to take something from you, and there was no legal consequence for that person. This system would quickly break down. As a result, in a capitalist society our private property rights must be protected, because this will give us the confidence to use our resources, rather than just defend them. 3. Democracy: There is a great deal of debate in the economic literature about the importance of democracy in a capitalist society. History has shown that these two system features generally work together; a country which acts as a democracy is almost always a capitalist society. However, this is not always true; Venezuela is a democratic country, and yet their economic system is not capitalist. Despite this, in general the theory will stand. If a person in a capitalist society does not like the laws that are protecting their private property rights, then they need to have the option to change them. This can only be achieved if they are given a political voice ; in other words, they need to have the right to vote. You can immediately see that these features are all present in the Australian economy. For example, after you leave school you will be able to choose where you want to work. In economic terms, we would say that you are able to decide how you will allocate your labour resource. If you buy a block of land you will need to conform to certain zoning restrictions (a legal framework), but in general you will be able to use that land in any way that you choose. And if you don t like the zoning restrictions, then at the next election you will be able to vote for a change.

8 7 REVIEW EXERCISE 2: AUSTRALIA S SYSTEM Think about the way the Australian economy operates. Fill out the table below with any examples you can think of. Discuss with your tutor after you have finished. Government Intervention Example Effect on behaviour Provide pensions and dole payments Provision of Public Goods Set taxation rates Provide health services Regulate wages

9 8 TYPES OF ECONOMIC SYSTEMS There are many ways to organise an economy. The most common types include the Planned Economy (otherwise known as the Command Economy), or the Market Economy (otherwise known as the Free- Enterprise Economy). Between these two extremes lies a variety of systems, which can be differentiated according to how much government intervention there is in the economy. Key factors of the main types include: PLANNED ECONOMY: the Government owns the businesses in the major sectors of the economy and also indicates how the private sector will be acting to ensure the particular industries reach the government targets for future output. WELFARE ECONOMY: the government uses high levels of taxation to achieve substantial transfers of income towards the lower income groups. Quite often Government expenditure can reach 50%. MIXED ECONOMY: decisions are made through markets, though governments do intervene to improve the allocation of resources, the amount of competition and to reduce the inequality in income distribution. Government expenditure usually equates to 24-40% of GDP. TRANSITION EOCNOMIES: these were centrally planned economies, but are now moving to becoming mixed market economies by allowing more private ownership of businesses and resources. AUSTRALIA has a mixed market economy in which individuals and business decision makers mainly determine what will be produced, how much will be produced and who will receive what income through a system of factor and commodity markets. REVIEW EXERCISE 3: TYPES OF ECONOMIC SYSTEMS 1. List the FOUR main types of economies and explain the key principles of each.

10 9 2. Outline the relationship between Government and Businesses in the following: i) Planned Economies ii) Market Economies iii) Welfare Economies 3. Complete the following table. Economy Type Key factors Examples (list 3) Planned Economy China, North Korea Welfare State Norway Mixed Market Australia, Japan Transition Economy Russia

11 10 HOMEWORK: RESEARCH TASK Your homework this week is to conduct an internet research task about an economy in Asia for comparison with Australia s economy. Chose from either: Malaysia, Indonesia, China, Singapore, Japan, Korea or the Philippines. Your research should include current information about: economic growth & quality of life; unemployment; distribution of income; environmental standards; political system; and role of government. What are the similarities and differences between the Australian economy and the economy you have chosen?

12 11.. End of homework